Corporate board perks: a proxy primer

Today I’d like to talk about executive compensation and the fun perquisites (“perks”) that make looking at a company’s proxy statement really interesting. Perks are those little extra somethings that make the financial lives of company executives and board members just a little bit easier. Like a shiny lure, perks attract the most talented ‘big fish’ and help retain them once they’re hooked.

Think of a proxy statement (aka the DEF 14A) as an aquarium of large and small moving objects that flash silver in the sunlight. Some things are easy to find, like annual compensation. Other things you need to look more carefully for as they glint in the weeds: like the perks. According to many sources (including this one and this one), corporate perks are on the wane. But they’re not extinct yet, and companies are very clever about the creative ways they compensate their executives.

Let’s start with some of the more common perks.

First, besides the six- or seven-figure salary, there are bonuses. Bonuses can include straight-up cash or be in the form of stock and/or options. There’s also deferred compensation, like pensions and retirement plans. Golden Handshakes (a bonus when the exec signs on), Golden Handcuffs (including stock options or phantom stock), and Golden Parachutes (severance, bonuses, stock, etc. if the company is bought by another) are some other examples. But there’s lots more…

PLANES, TRAINS, AND AUTOMOBILES (Well, mostly just planes and automobiles)

Chances are good that most senior executives of large publicly-held companies are being driven to work in a big black Town Car. This allows them to be delivered safely to the office while getting work done in transit. Alternatively, they may be driving themselves to work in a company car, giving them the ability to get stuck in traffic while listening to NPR like the rest of us.

Or, they could be going to work (or play) in a jet. After 9/11, many large companies started insisting that their executives use company jets for both business and personal travel for safety reasons. Whether it’s automobiles or planes, this extra income can mean extra taxes for the executive. Fortunately, there’s a solution via another perk called…

THE TAX GROSS-UP

Let’s say that an executive uses the company’s jet when she goes on vacation with her family. Because it’s for personal use, she needs to pay tax on the value of that perk. A tax gross-up is an extra boost in her paycheck to cover the taxes on that perk’s value.

Gross-ups can be used for other things, like reimbursement for taxes paid on their compensation or life insurance required by the company. Gross-ups are perks to pay for perks.

PERKS CAN BE JUST ABOUT ANYTHING

Personal security, medical exams, home phone and internet, country club dues, nannies or other household staff, villas in Vegas…even dry cleaning and gym memberships.

MEANWHILE, BACK AT THE AQUARIUM

Let’s get back to the proxy statement. As I’ve mentioned in previous posts, the proxy statement is also called the DEF 14A, the “definitive proxy statement.” You can usually find this document at the company’s website or on the SEC’s Edgar search page.

If you’re up for it, let’s look at a proxy statement together. If you’re not, just have a look at some of these interesting articles and a great blog about executive compensation…

For this exercise, I randomly selectedHollyFrontier Corporation. ( ← Click there to download the pdf of the proxy). Based in Dallas, TX, HollyFrontier is one of the largest independent petroleum refiners in the United States.

We’re not going to go through everything; I’m just going to hit the highlights. If you’re serious about learning this, I’d really recommend taking an hour or so to read and understand the whole document.

Reading an SEC filing can sound kind of daunting and scary, but it’s really not. It just takes some quiet time set aside and internet access so you can look up terms that you don’t quite understand. Wikipedia and the dictionary in Investopedia are great.

So if you can, read the whole thing. If you can’t, here are places I’d recommend stopping and reading in the HollyFrontier proxy:

pp. 5-7 An overview of the company’s compensation policies as well as details on each executive’s compensation

p 25-28 Check out director compensation here, and read the footnotes!

p. 37 Read ‘Other Benefits and Perquisites’

p. 43-44 Read from ‘Individual Performance Measures’ to the compensation of Mr. Stump.

p. 45 Read ‘Recoupment of Compensation.’

pp. 51-64 This is the meat. Pay special attention to the math in the retirement plan and deferred compensation sections. For example, if there is a change in control of the company (ie, it gets sold or merges with another company), the executive and his family will continue to be able to participate in the company’s health insurance plan for a specific amount of time post sale/merger.

p. 71 This table is largely explained in the previous pages, so if you have questions, look before, not after the table.

p. 73 Includes information about stock ownership for both directors and executives. Don’t miss footnote 4, which illustrates information you can discover about family holdings.

PHEW!

If you went through this exercise with me, you’re probably exhausted now (and you deserve a huge pat on the back!). But there are a few other useful SEC documents to take a look at, including the 10-K, 10-Q and Form 4. Now that you’ve learned that reading a proxy isn’t all that daunting, try one of these other reports as well.

Executive compensation can be much more than just the salary and bonus. If you want to increase your understanding of a prospective donor’s capacity to give, spend some time reading the fine print in a proxy.